Use the LR curve to show how each of the following shocks affects output, the real interest rate, and the price level in the short run and the long…
Use the LR curve to show how each of the following shocks affects output, the real interest rate, and the price level in the short run and the long run, following the Keynesian model. Draw a diagram to answer each question.
a) An increased investment tax credit designed to stimulate investment is put into place, and the Fed does not change its target for the real interest rate.
b) An increased investment tax credit designed to stimulate investment is put into places, and the Fed changes its target for the real interest rate to keep output from changing in the short run.
c) The expected inflation rate increases, and the Fed keeps its target for the nominal interest rate unchanged.
d) The expected inflation rate increases, and the Fed keeps its target for the real interest rate unchanged.
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